9 June 2017

Recovery or Expansion? A View of the US Economy

At the 70th CFA Institute Annual Conference in Philadelphia, Goldman Sachs Senior Investment Strategist Abby Joseph Cohen, CFA, declared that the US economy is not just in recovery, it is now in an expansion. Growth, as always, has varied by sector, but Cohen saw room for optimism. From her perspective, the United States is looking far healthier than it did during the years in and around the 2008 financial crisis.

Cohen observed that the US consumer balance sheet is now in much better shape since the crisis. Household debt service payments as a percent of disposable personal income have fallen from a peak of 13.3% in the fourth quarter of 2007 to as little as 9.9% at the end of 2016. Of course, this is contingent in part on the persistence of low interest rates. Because rates are already low, Cohen expected that a modest rise would not have much of an adverse impact on economies.

However, Cohen did have some concerns about fixed-income markets, noting that “there is not one market where we think rates are as high as they should be.” If interest rates do move up, they could introduce difficulties for countries that had been experimenting with negative rates. Cohen added that “as a former Fed economist, I understand the argument for negative interest rates. As a market observer, I think they are a folly.”

Nevertheless, Cohen remains optimistic. She urged policy makers to push basic research and science, technology, engineering, and mathematics (STEM) education as an area for great opportunity. Cohen asserted that STEM-related investment creates not only employment benefits for individual workers, but also a productivity boost for the broader economy. She said that President Trump’s plans to cut regulations should also stimulate economic growth.

As a final point to support her argument for economic expansion, Cohen emphasized that companies in recent years had been choosing higher allocations to dividends and stock repurchases, spending only 58% of their cash on capital expenditures, research and development, and mergers and acquisitions, which is down from a historical 70% or so. Looking forward, Cohen expects companies to move away from dividends and stock repurchases back toward more growth-related investments.

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